A number of recent publications from economic think tanks and respected industry commentators are suggesting that there will be further adjustment in property values over the next few years.
The Land Registry reported the biggest monthly drop in house prices in more than two years in March, and now the National Institute of Economic and Social Research (NIESR) has said inflationary pressures in the coming years would erode any rise in nominal house prices.
The prediction by the NIESR came as ratings agency Standard & Poor forecast a 5% fall in house prices during 2011, due to George Osborne's austerity Budget deterring prospective buyers from taking the plunge. Data published yesterday by the Bank of England showed that the housing market weakened in March with mortgage lending falling 60%, while a Markit/CIPs survey reported that housebuilders experienced their first decline in activity of the year. Nationwide building society reported yesterday that house prices fell in April as well, by 0.2%, down 1.3% from a year earlier. The society predicted prices would now move sideways or "drift modestly lower" during the year.
But this is more optimistic than some economists, who believe that house prices are now likely to fall further. Forecasters at NIESR said: "We expect the housing market to remain weak over the coming three years.
"House prices have been overvalued for much of the past decade, but with current low borrowing costs they look about right. However, borrowing costs are likely to rise over the next five years as policy rates set by the Bank of England move from crisis levels near zero to normal levels of around 5%. These increases are likely to induce real house prices to fall by around 2% a year for the next five years."
Other economists are also analysing the impact of spending cuts. Paul Diggle, property economist at Capital Economics, said he expected falls in house prices "in the face of large public sector cuts". The Land Registry showed a clear north-south divide that may widen. "Following a hefty 5.3% month-on-month fall in March, Yorkshire & Humberside joined the north-east in seeing prices fall below the previous trough around Easter 2009," Diggle said. "Prices in Wales and the West Midlands are just 0.2% and 1.3% respectively above their previous lows. These regions are likely to be at the sharp-end of public sector spending cuts, meaning that, for now, they should continue to lead the rest of the country into the second leg of the house price correction," he added.
When inflation figures are factored in, the real value of property assets will take a further hit and the question is what will be the impact on the Private Rental Sector. Of course, yields will begin to look more attractive if rents hold firm. There are significant drivers for that to be the case: a continued imbalance of supply and demand, particularly at the top end of the market; further demand being placed on the sector by changes in the housing benefit elligibilty for single young people, and the stagnation of house building in the UK in general and in Oxford in particular.
The Oxford market has traditionally remained relatively "bullet proof" in previous property market downturns. This might explain why so many new investors seem to be buying here at the moment. We still do not know the outcome of some significant local interventions which may have further impact on local property values. Certainly "Prime Central North Oxford" market seems robust, with anecdotal evidence of properties selling for well above pre-crash levels, but what of other parts of town? If the Article 4 directive and subsequent moves to stiffle the proliferation of HMOs in East Oxford were to have a real impact (together with a dramatic increase in institutional investment in purpose built student accomodation) we could see dramatic differentials in property values evolving in some streets.
Cash rich investors are still buying established HMO property of C3 usage that can be converted to C4 before the February "date gate". This is certainly holding up property values in Central and East Oxford as well as parts of Headington, but it would be interesting to see what is happening to property values closer to the ring road.
The graph, which I received yesterday by email and through Twitter, seems to have come from Moneyweek and Bloomberg.... but as in all things Tweeted at the moment, may or may not be the truth the whole truth and nothing but the truth! Still no-one has taken out an injuction against it.